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Cablevision Systems Corporation (CVC) recently filed an antitrust law suit against media giant Viacom Inc. (VIAB) for forcing the former to take up bundled TV channels, inclusive of less popular networks like CMT, MTV Hits, Nick Jr, Nicktoons, Palladia and VH1 Classic. The case is under wraps and not available for public viewing.

With respect to the litigation, Viacom believes that these Pay-TV operators actually gain from such deals as they get more channels at low cost.

At the end of last year, Cablevision and Viacom entered into a long-term agreement, under which the former will carry Viacom’s network for an undisclosed amount. However, we believe that mounting programming costs and failure to strike a better bargain with Viacom has forced Cablevision to file such litigation against the media giant.

Generally, most media companies follow the similar business pattern of bundling their low rated channels with other popular channels, hence inflating the channel package rates.

Such harmful practices have not only increased programming expenses of cable and satellite TV operators but at the same time, have also affected margins in a big way. Moreover, the numbers of channel blackouts have also increased over the last year, resulting from disagreement between media partners and cable and satellite operators.

Last year, DIRECTV (DTV) – the largest satellite TV operator in the U.S – failed to renew its contract with Viacom as the former was demanding a huge hike in fees, which resulted in blackout of channels for nine days. Finally, DIRECTV resumed its channel service by renewing the contract at a 20% higher rate.

Likewise, in 2012, higher demand for fees had forced Time Warner Cable Inc. (TWC) to drop Ovation network while Dish Network Corp. too dropped AMC Network channels from their popular program lists.

So we believe that such serious allegation brought by Cablevision may raise big questions over the business model followed by the media companies.

Currently, Cablevision has a Zacks Rank #4 (Sell).

 
CABLEVISION SYS (CVC): Free Stock Analysis Report
 
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